Keeping a trading diary will help you accomplish these things: It will force you to maintain your pre-purchase checklist . It will also make you articulate why you made certain purchases. That often turns out to be important in the evaluation process later on, when trying to determine just why you bought that pig. Having a clear idea of why you own a specific name will put you in a better position to see your entire investing picture. It gives you insight into your own performance. On an individual stock level, you may discover what tactical errors you may be making. Are you being too impatient? Are your stop losses too tight? Or are you letting stocks get too far away from you before you finally cut them loose? Technical traders might find that they are getting sucked into a false breakout; value investors might be buying cheap stocks that keep getting even cheaper. The diary is also a good way to avoid repeating the same errors. I much prefer to discover new and different errors (and do so all the time!). I don't mind the occasional error -- if I can learn something from it -- but I try never to repeat the same mistake twice. Lastly, and perhaps most importantly, your trading diary will help you improve your overall strategic performance. Doing a post-mortem on your trades will help you adjust your strategy and philosophy. Are you over-trading? Are your positions too large? Perhaps you are bucking the major trend. Regardless, a good trading diary will help you understand exactly what you are doing right and wrong.
Words and Numbers
Let's get into the nitty-gritty of your trading diary. There are two aspects to this. The first consists of documenting each individual position before purchase; this is simply another part of your pre-purchase research, and it will help you in your review process. The second aspect is analyzing your investing performance afterward, something we will get into in more detail in a later column. (For a preview, check out this link.)